Hernan Kazah, co-founder at KASZEK. Photo: KASZEK/Courtesy

Hernan Kazah: Critical mass of tech-savvy adopters spurs unicorn builder KASZEK’s deals in Latin America

LABS reached out to Hernan Kazah, KASZEK's co-founder, for a Q&A about Latin America's upbeat ecosystem, next infusions, and possible IPOs by companies from the firm's portfolio

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Ten years ago, Mercado Libre‘s co-founder Hernan Kazah decided it was time to leave the e-commerce behemoth he had built to invest in Latin American tech companies. He joined forces with Mercado Libre’s former CFO Nicolas Szekasy to create one of the most prominent Latin America’s venture capital firms, KASZEK, whose name comes from the merger between Kazah and Szekasy. 

The company started as Kaszek Ventures to give people an idea of what the two former executives of Mercado Libre were really up to. After over $2 billion of raised capital and an ecosystem already familiar with the venture capital universe, the company decided to adopt only KASZEK as a strategy to refresh its image. 

KASZEK has nine Latin American unicorns (Nubank, QuintoAndar, Kavak, Creditas, Gympass, Madeira Madeira, PedidosYa, Loggi, and Bitso) and almost 92 backed startups on its portfolio – “almost” because it recently signed a term sheet with a fintech that will probably be the first investee of KASZEK’s latest funds. According to Kazah, for every 50 term sheets that the company signs, it closes 49. 

The firm recently announced two new funds, which together will allocate more than $1 billion to Latin American tech companies: Kaszek Ventures V, a $475 million early-stage venture fund, and Kaszek Ventures Opportunity II, a $535 million fund for later-stage companies. 

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But it’s not all a bed of roses for venture capital firms. Amid the successful stories, there are also those investments that just didn’t pay off, several ideas that fail or do not have a big enough impact to go to the headlines. But that is part of the venture capital’s game. Kazah doesn’t disclose the fund’s net equity IRR (internal rate of return over investments) but says it has reached “double digits” and that ” approaches 60%”. As a comparison, the 2-years-old SoftBank Latin America fund recently disclosed that its net equity IRR, so far, is 62%.

LABS reached out to Kazah for a Q&A about Latin America’s upbeat ecosystem (even amid an economic backdrop of falling activity, unemployment, and rising inflation), the possibility of a KASZEK SPAC, and possible IPOs by companies from the firm’s portfolio.

Isabela Fleischmann: You just made an impressive closing of two new funds. Has the search for startups to invest in already started for these funds?

Hernan Kazah: Yes, it has begun. How this industry works: first, you raise a fund, [then] you start building a portfolio of that fund, and once you see that you have that portfolio, you raise capital to continue investing in [those same] companies. But [at the same time], you start building a new fund to a new portfolio. So, we still have capital available from our prior funds, but that capital will only go to the companies from that previous fund. So, yes, we started looking for new companies for these two new funds. We signed a term sheet for that new portfolio two weeks ago, so, with that term sheet moving forward and closing, we will have the new company of the new fund. 

IF: Can you disclose which company it is?

Kazah: I cannot because we have signed a term sheet; we have an agreement. For every 50 term sheets that we sign, we close 49. But just in case, we prefer not to comment on that for now. 

IF: But can you disclose the type of firm? Are you interested in any specific industry?

HK: We are agnostic about industries. We invest in any industry where we feel that technology is either creating a disruption or providing a new service or a new product that will basically serve new emerging demand. I can tell you that this company we are investing in is in the fintech area. 

IF: How many companies do you intend to back with these new funds, and with what amount?

HK: We raised two funds, the early-stage fund [Kaszek Ventures V] and the Opportunity Fund [Kaszek Ventures Opportunity II]. For the early-stage fund, we expect to invest in approximately 25 to 30 companies, so those $475 million will be divided into these companies. 

We also raised an Opportunity fund to continue investing in the best companies of our early-stage portfolios. In that case, the fund is slightly larger, $535 million, and we expect to invest that in roughly 15 companies. Obviously, because it’s a later stage [fund], the average check is larger for this second fund. 

IF: It took KASZEK a decade to raise $1 billion. Now, you’ve done it with these two funds and at once. How do you see that, and why do you believe that was possible now?

HK: Yes, we raised slightly above a billion dollars in our first ten years, and now we raised a billion in just one fundraising process. I think that reflects two things. 

One – probably the most important one – is the positive evolution that the technology ecosystem has had in the region. If you look at how the ecosystem was ten years ago, everything was very nascent. Today, what you have is a quite robust ecosystem with lots of great entrepreneurs, obviously [all of this also thanks to] significant penetration of mobile internet and lots of users. Clearly, the market is much larger today, and that justifies the larger funds. I think this is the most relevant point. 

The second reason is our good performance. Investors and entrepreneurs have seen how we work, the kind of value we create, the kind of return our funds have. Therefore, they also wanted to be exposed to KASZEK and trust us with the capital to hopefully find the next iconic companies in Latin America. 

IF: Following this question, you left Mercado Libre when you saw an opportunity to invest in LatAm companies. So what changed from that time to now? How do you see the ecosystem in the region? 

HK: Going back 22 years when we started Mercado Libre in a garage in Buenos Aires, we were big believers that the secular technology trends that we were seeing in the U.S. and a few more developed markets would happen in Latin America. That’s why we went ahead and created Mercado Libre, and that’s also why Mercado Libre is on top of its terrific execution, had such a great run. 

In 2011, when we decided to start Kaszek Ventures, that continued to be the case. We continued to see that those global secular trends were going to happen in Latin America. It was more evident than in 1999, when we started Mercado Libre, but not completely evident. Hence, lots of investors and global tech companies were hesitant about the possibility of Latin America taking off tech ways. 

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We believed that was going to happen. And it has happened big time. Maybe later than we initially expected, but with innovation, it was much stronger. It’s like you’re on a long runway, and the plane starts to go through that runway, and it goes and goes, and you expect for that plane to take off, and it doesn’t take off; it takes longer. Eventually, it takes off. But when it takes off, it starts flying at a much higher altitude. I think that’s what happened with technology in Latin America. 

IF: Did COVID-19 boost it?

HK: There were two big inflection points. The underline trends were there, and there were more internet users, and penetration was growing. The [first] inflection point was [between] 2014 and 2017, when the mobile revolution changed everything because it accelerated penetration. 

Some people that in the past didn’t have a connection with the computer, no experience with the computer, suddenly had smartphones in their hands. So that changed everything. It accelerated the number of users, the intensity of usage of applications; that’s one big change. And the other is COVID-19. 

It’s a tragedy for humanity, still a significant challenge for all of us, but in terms of technology, it significantly accelerated digitization. It was a process that was already happening, but things that we thought were going to happen in three, five years, happened in one. 

Those two big events certainly are very connected with the development of the technology ecosystem [in Latin America].

IF: You have a lot of success stories with nine unicorns. But KASZEK has backed 91 firms so far. Is there any failure story among them too?

HK: Obviously, there are. In this industry, we are investing in the future. As you can imagine, predicting the future is quite challenging. Sometimes we believe in a trend, we partner with amazing entrepreneurs that also believe in that trend, and they start executing their idea. [But sometimes] that technology we thought was going to emerge takes longer to emerge, so the company runs out of capital and it doesn’t succeed. 

Or sometimes, it doesn’t take off; there is parallel technology that emerges with stronger trends that end up winning the battle. So yes, in the venture capital process, you place intelligent bets on great teams and great ideas, but then some of those don’t work; it’s part of the game. At the end of the day, the returns came from a few very successful companies. 

In the venture capital process, you place intelligent bets on great teams and great ideas, but then some of those don’t work; it’s part of the game. At the end of the day, the returns came from a few very successful companies. 

hernan kazah, co-founder at kaszek

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Then we have a group of companies that do well, that have a positive impact on the ecosystem, a positive impact on the economy of their country. They generate employment but are not really large, and they are not those that you read in the news all the time. And then others fail. 

We have all of those in our portfolio: those that are great and successful, those that are successful but with small impact, and those that have failed.

IF: KASZEK’s return over investment costs are valued at what amount?

HK: We don’t disclose that amount. The funds are doing really well, are at the top of global VC firms in terms of returns, but we don’t disclose that. 

IF: The fund’s net equity IRR is what percentage?

HK: We don’t say it, but it’s double digits. 

IF: Higher than 60%? 

HK: It’s close to it. 

IF: Do you see any exits in your portfolio any time soon?

HK: It’s always hard to predict. It’s not something that concerns us. What we try to accomplish is to partner with a great entrepreneur who ends up building a great company. Then if we have great companies in our portfolio and those companies are growing and serving more clients, improving their products, and producing more significant financial results, we are very happy with that. 

Eventually, the entrepreneurs and the investors will decide when it’s the best time to exit that company to produce some liquidity for shareholders. But we have no rush in that process. We think that we have lots of terrific companies in our portfolio that will be very successful publicly traded companies like MadeiraMadeira, QuintoAndar, Creditas, Loggi, Gympass, Bitso, Kavak, all those. But we are not in a rush to take them public.

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As you know, today’s markets allow companies to remain private for longer because there’s a lot of available capital for good private companies, so it’s more a question for the entrepreneur when he or she decides to move forward. I cannot comment on any particular plan, but there are great companies that, probably over the next year or the next two years, you will see going public in Nasdaq or NYSE. 

IF: Some companies like SoftBank and Valor Capital are building SPACs (the acronym for special purpose acquisition company) in the region. Do you see KASZEK creating a SPAC?

HK: I think it’s a great tool. I think it is also good for the ecosystem because it provides more liquidity to entrepreneurs, more liquidity to companies, and a faster path to be a public company, so we like that, and we’re considering it.

IF: If that was the case of building a new SPAC, do you have any forecast for when it would happen?

HK: No, we don’t have any particular plan yet. But it’s something we’re following; we think that with the right sponsor and the right target, it could be a great vehicle. Obviously, there has been some negative press related to SPACs because not-so-great sponsors were targeting not-so-great companies, which created some noise. But I think the instrument is good. It depends on how you use it, and if you have a good sponsor that’s looking to this for the long run and if you have a good kind quality company that can use a SPAC to get some liquidity and become public sooner, I think that could be a terrific combination. 

IF: If you could summarize what is happening in LatAm’s startup ecosystem now, how would you describe it? Even with an economic crash, inflation, money is still running in VCs. Why? 

HK: I think two things are happening at once. And I think that’s why we are seeing so much activity. One is the [presence of a] critical mass in the market today. If you look at successful companies like Nubank or QuintoAndar, or Kavak, those are large companies with a very significant top-line serving millions of customers. [So] You have a critical mass [built after the increase in mobile and broadband internet penetration] and a large market to build large companies.

Critical mass for technology is very important because, at the end of the day, almost all tech models in Latin America depend on the economic scale. If you have a small market, it costs the same as if you have a large market. That’s one thing. 

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Another thing that’s happening is that we’re still in [our] early days. If you look at where technology can still grow in Latin America, it’s everywhere. If you compare what we have in Latin America to what you see in China and Southeast Asia or the U.S., there’s still lots of room to grow. Particularly, we believe that Latin America is an area of the world with lots of unattended and underserved needs. We believe that through technology, many of those needs…not that they would be entirely solved, but [things] will be improved. 

Like companies providing solutions around commerce, financial services, financial inclusion, healthcare, education. In the past, that opportunity was there, but there was no critical mass [to reach]. Today you have critical mass and you also have the opportunity, so I think we’re in the best possible moment and time to continue developing the ecosystem.

IF: Do you have any forecast for the next few years for LatAm and KASZEK’s fair value over investments costs, like how much the fund’s assets will be valued?

HK: Markets go up and down. But in the long run, they go, even more so with technology. So we’re sure that if we find the right entrepreneurs pursuing the right opportunities, the value of our portfolio will only continue to increase. 

I’m very optimistic that it is going to happen but putting a number on it is hard. 

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What we have done in the past helps us because the prior success made us raise more capital now and allowed us to connect with the new generation of entrepreneurs, but we need to keep working on the new portfolio. This is an industry where work never ends. You need to keep building the next portfolio while you’re still helping your prior portfolios.